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Japanese stocks back in bear market as yen hits 15-year high

In a world in which almost no one wants to have a strong currency, Japan has one of the strongest.

But the pain of carrying that burden is becoming intense.

The yen surged to a 15-year high against the dollar Tuesday, which in turn helped drive the Tokyo stock market’s Nikkei 225 index to a new 15-month low -- and back into bear-market territory.

The dollar was worth 83.90 yen, down from 85.28 on Monday and the least since 1995. Just since early May the yen has strengthened from about 95 per dollar.

The Nikkei stock index Tuesday slumped 121.55 points, or 1.3%, to 8,995.14, its first close below 9,000 since May 1, 2009. The Nikkei now is down 20.7% from its 2010 high reached in April, crossing the 20% threshold that is the standard measure of a bear market.

By contrast, the U.S. Standard & Poor’s 500 index is off 13.6% from its spring high.

Then yen’s climb hasn't been a byproduct of economic strength. Japanese gross domestic product growth slowed to a mere 0.4% annualized rate in the second quarter.

Rather, the yen’s latest rise reflects other forces that are pushing up demand for the currency, including Japan’s still-large trade surplus (as money comes home it must be converted to yen) and the seemingly universal investor desire for a haven amid rising concerns about the global economy’s health (i.e., the yen is still perceived to be a good place to hide).

This also has become a game of chicken on the part of opportunistic currency traders: How far can they push the yen before the government takes decisive action to try to weaken the currency?

Traders were emboldened after an expected face-to-face meeting Monday between Prime Minister Naoto Kan and Bank of Japan Gov. Masaaki Shirakawa didn’t happen; they spoke only by phone, and nothing was announced.

On Tuesday, Kan said that “steep currency moves are undesirable” but didn’t say the government would intervene.

“More official jawboning was heard [Tuesday] by Japan officials, but given the boilerplate nature of those comments, they did little to dissuade markets from taking the yen higher,” currency strategists at Brown Bros. Harriman said in a note.

If Japan does decide to intervene to weaken the yen, and succeeds, it will have to be at someone else’s expense -- and that’s the problem. The U.S. doesn’t really want a stronger dollar at a time when it’s trying to boost exports; ditto for the Europeans and the euro. A rising currency means your exports get more expensive for foreign buyers.

That’s the state of the global economy: We have an excess of producers and not enough consumers.